Banks Brace for Dismal Quarter

It's no secret that the banking sector is expected to report dismal fourth-quarter earnings beginning with JPMorgan Chase (JPM Quote) Thursday morning and Citigroup (C Quote) on Friday morning.

Banks will once again be busy setting aside additional capital for future loan losses, taking further impairments on securities-related instruments and assuring Wall Street that their capital levels are safe.

Todd Hagerman, a senior analyst at Credit Suisse's U.S. bank equity research team, offered his perspective on the troubled banking sector and how the fourth quarter compares to other quarters last year.

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TheStreet.com: In general, why is the fourth quarter of the year generally the worst quarter for banks than other quarters? Why will last year's fourth quarter be even worse than usual?

Todd Hagerman: Year-end results are typically underscored by a fair amount of balance sheet repositioning and credit clean-up in anticipation of the coming year. With bank earnings so dependent on credit costs and interest rates, banks try to find ways to put as much of the "costs" and pain behind them as they try to position themselves for better-than-expected earnings in the coming year.

Industry observers believe [last year's] fourth quarter will be the worst quarter since 1990 due to the unprecedented pace and decline in credit quality over the last several months. At the same time, the industry is beginning to prepare for what could possibly be a long and deep recession. To this end, the industry's receipt of funding [from the Troubled Asset Relief Program, or TARP] likely provides a powerful incentive to accelerate more credit losses in the quarter as well as increase underfunded loan loss reserves for the future. These actions could very well put banks in the red for the first time since 1990.